FAO Schwarz is weeks away from closing the doors to its landmark toy store on Manhattan’s Fifth Avenue, a store that offered more than merchandise; it offered an “experience.” When the toy empire moved there in 1986, it wrapped the building like a giant Christmas gift in red cloth and a big white bow. It featured three levels for toys, a candy store, a LEGO-lover’s paradise and that giant floor piano Tom Hanks and Robert Loggia danced on in the 1988 movie “Big.” Its enormous stuffed teddy bears were so expensive they were out of reach for most people who marveled at them.
So customers soaked up the “experience,” and it cost them nothing.
That is one of the possible reasons for the downfall of the famed FAO Schwarz, says Columbia Business School professor Rita Gunther McGrath.
“They tried to make a profit on items customers didn’t see value in, while simultaneously giving the experience of being in the store away for free,” she wrote in Fortune this week in an article titled “FAO Schwarz didn’t have to die.”
“In a ‘say it ain’t so’ moment,” she wrote, “beloved toy store FAO Schwarz has announced that it will not be staying in business, even though its lease on the grand space it occupies at Fifth Avenue and 58th street is not up for renewal for some time. The company evidently couldn’t escape the pressures of relentless competition from the likes of warehouse stores, Amazon, Wal-Mart, Target, and even its owner, Toys R Us, which doomed other toy sellers such as mall staples K-B Toys and Zany Brainy.”
FAO Schwarz carved out its niche as a specialty toy store. Sure, price tags there were bigger, but it had become a brand — its extravagance was part of its charm.
“They’re positioning themselves as unique in the market,” toy industry analyst Christopher Byrne told the Wall Street Journal many years ago. “They’re not trying to be all things to all people.”
However, industry experts agree, it’s that business model that may have eventually led to its own demise.
FAO Schwarz’s struggles started as discount sellers such as Amazon, Target and Wal-Mart entered the toy scene, offering alternatives at a cheaper price. The company was eventually bought by Toys “R” Us, which announced this month that the store will close July 15. Although the company says it’s looking for another location, some speculate it may fade away, at least as a physical presence.
According to Toys “R” Us’s statement:
For the past several years, Toys“R”Us has been reviewing its lease renewal options for the FAO Schwarz Fifth Avenue location and one of these options was to not renew the lease agreement, which the company has decided to do. In working with the property owner, the company was able to agree on an early exit in advance of the 2017 lease expiration, providing the opportunity to realize meaningful rent savings. As a result, we plan to formally close the Fifth Avenue location on Wednesday, July 15.
The decision to vacate this space is due to the continuing rising costs of operating a retail location on Fifth Avenue in New York City. The company is committed to the FAO Schwarz brand and growing its legacy. In fact, it is actively searching for another location in midtown Manhattan where FAO Schwarz can welcome shoppers from around the world. The company is working diligently to place as many full- and part-time team members as possible at Toys“R”Us and Babies“R”Us locations in the greater New York/New Jersey area.
FAO Schwarz originated in Baltimore. In the Civil War era, German immigrant Frederick August Otto Schwarz came to America and started working for a stationery importer, Time magazine once reported. It wasn’t uncommon, at the time, for shops to pack other items — like toys — with the stationery to expand their businesses. Schwarz started putting toys in the store window and, when they started selling faster than the stationery, he and his brothers opened a toy shop called Toy Bazaar.
Schwarz built his luxury toy brand by importing unique toys from Europe. A catalog from 1911, advertised “baby carriages, hammocks, seaside toys, outdoor games and books.” A baseball mitt cost $1, a steel wagon $3 and a “specialty” doll up to $10. A toy automobile with “two lamps and horn” carried a $50 price tag.
“We invite your perusal,” it says, “and wish to emphasize that we do not claim this catalogue to be a complete list of our large varieties.”
“There were very, very few manufactured toys in the U.S.,” Byrne recently told the New York Times. “These were luxury goods, the dolls and the trains and the building blocks, and these were unheard-of.”
FAO Schwartz opened stores all over the country. It boomed. It changed hands numerous times. Its flagship store moved to several locations in Manhattan before it settled in its current location on Fifth Avenue. There, the toy store created that experience for parents and their children.
“Toys, you see, are life in miniature,” former FAO Schwarz President Philip Kirkham told Time in 1962.
So why did the toy giant fall? McGrath said she doesn’t think it had to.
“Instead, I would argue it is a result of the retailer clinging for far too long to a losing business model, when one that could have saved it was just down the street,” she wrote. She was referring specifically to competing specialty toy stores such as the American Girl Place and Build-A-Bear workshop that popped up in the area and started selling not only toys but also the experiences that go along with them.
That said, FAO Schwarz at one time was the only place where a kid could create his own toy car at the store’s Hot Wheels Factory, the Wall Street Journal reported.
Still, many industry experts agree it was the discount toy market that eventually led to toy empire’s erosion. FAO Schwarz, for example, once sold Sesame Street figurines for $9, while other stores priced them at $3, according to a McGraw Hill Higher Education business case study. And the Wall Street Journal reported that when FAO Schwarz started to compete with those prices, “it lost its cachet, business dwindled.” It was also up against specialty retailers like Best Buy and GameStop.
FAO Schwarz filed for bankruptcy in 2003. The next year, investment firm D.E. Shaw & Co. bought it out and downsized, according to the Wall Street Journal.
Then in 2009, Toys “R” Us took ownership. “This was probably one of the only ways to save FAO Schwarz,” Byrne told Crain’s New York at the time. “It solidifies Toys ‘R’ Us as the leading specialty toy retailer in the nation, and it adds a jewel in their crown — they’ll get more specialty brands.”
It didn’t save it. The company said it is looking for another location in Manhattan and, in the meantime, Toys “R” Us will continue to sell its merchandise in its own stores and online.
[This story has been updated.]